Cirelli v. Comm'r of Internal Revenue
| Citation | 82 T.C. 335,82 T.C. No. 27 |
| Decision Date | 28 February 1984 |
| Docket Number | Docket Nos. 14917–82,14963–82,14991–82,14992–82,14919–82,14918–82,15244–82. |
| Parties | JOYCE ANN CIRELLI, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
C's five children formed a “partnership” which leased equipment and a yacht to C corporation, a construction contractor. Held, the partnership is a “sham,” whether viewed under the section 704(e) regulations or the test in Commissioner v. Culbertson, 337 U.S. 733 (1949). Held further, the “partnership's” property will be treated, for Federal tax purposes, as being owned by C corporation. Held further, expenses relating to the yacht are not deductible, since the yacht was acquired and used for C's personal purposes. Held further, constructive dividends to C from C corporation determined. Howard Levinton and Steven K. Fedder, for the petitioners.
John F. Dean, for the respondent.
Respondent determined the following deficiencies in petitioners' Federal income taxes:
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¦Petitioners ¦Docket No. ¦Year ¦Deficiency ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Joyce Ann Cirelli ¦14917-82 ¦1973 ¦$129.74 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1974 ¦171.44 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1975 ¦1,723.54 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Lucia Ann Cirelli ¦14918-82 ¦1973 ¦129.74 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1974 ¦320.11 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1975 ¦1,546.55 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Mary Cirelli ¦14919-82 ¦1973 ¦129.74 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1974 ¦321.00 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦1975 ¦1,545.14 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Jack Leone and Barbara Leone ¦14963-82 ¦1975 ¦2,387.15 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦John Cirelli ¦14991-82 ¦1975 ¦1,964.60 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Charles J. Cirelli and Martha C. Cirelli¦14992-82 ¦1975 ¦25,995.20 ¦
+----------------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------+------------+------+------------¦
¦Charles J. Cirelli & Son, Inc. ¦15244-82 ¦1975 ¦25,087.86 ¦
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The principal issue for decision is whether a partnership composed of Charles J. and Martha C. Cirelli's five children is valid for Federal income tax purposes for 1975.2 Because of our disposition of the principal issue, we must also determine who shall be treated, for tax purposes, as owning C Equipment Company's property, whether amounts paid by Charles J. Cirelli & Son, Inc., to C Equipment Company are deductible as ordinary and necessary business expenses, and whether certain amounts are constructive dividends taxable to Charles J. Cirelli.
Some of the facts have been stipulated and are found accordingly. All of the individual petitioners resided, and the corporate petitioner had its principal place of business, in Maryland when they filed their petitions herein.
Joyce Ann Cirelli, Lucia Ann Cirelli, Mary Cirelli, Barbara Leone, and John Cirelli (the children) are the children of Charles J. and Martha C. Cirelli. Jack Leone (Leone) is Barbara's husband. During 1972 through 1974, Charles J. Cirelli (sometimes referred to hereafter as Cirelli) owned 100 percent of Charles J. Cirelli & Son, Inc. (the Cirelli corporation or the corporation); in 1975, Cirelli owned 96 percent and Clayton Miller owned the remaining 4 percent. Cirelli served as the corporation's president.
The Cirelli corporation was, during 1972 through 1975, a general contractor engaged primarily in the construction of buildings for state and local governments. The corporation reported taxable income of $32,166.44 in 1972, $33,747.54 in 1973, $120,464.56 in 1974, and $93,081.01 in 1975. The Cirelli corporation's working capital at the end of each year, i.e., current assets less current liabilities, increased as follows for the years 1970 through 1975:
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¦ ¦ ¦Increase in ¦Percentage increase ¦
+------+-----------------+-----------------+---------------------¦
¦Year ¦Working capital ¦working capital ¦in working capital ¦
+------+-----------------+-----------------+---------------------¦
¦ ¦ ¦ ¦ ¦
+------+-----------------+-----------------+---------------------¦
¦1970 ¦$102,782 ¦ ¦ ¦
+------+-----------------+-----------------+---------------------¦
¦1971 ¦223,870 ¦$121,088 ¦118% ¦
+------+-----------------+-----------------+---------------------¦
¦1972 ¦456,535 ¦232,665 ¦104 ¦
+------+-----------------+-----------------+---------------------¦
¦1973 ¦464,567 ¦8,032 ¦2 ¦
+------+-----------------+-----------------+---------------------¦
¦1974 ¦843,622 ¦379,055 ¦82 ¦
+------+-----------------+-----------------+---------------------¦
¦1975 ¦2,247,586 ¦1,403,964 ¦166 ¦
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On or about August 1, 1972, Barbara Leone, John Cirelli, Joyce Ann Cirelli, and Martha C. Cirelli, as custodian for Lucia Ann and Mary Cirelli, signed an agreement creating C Equipment Company (the partnership), a partnership under Maryland law.3 Each of the children had a 20-percent interest in the partnership. None of the children contributed any capital to the partnership between 1972 and 1975. The partnership was initially funded by a $5,000 loan from Cirelli on August 18, 1972, which was subsequently repaid in 1972.
The ages of the children (four of whom lived with the elder Cirellis during the taxable years at issue) as of the creation of the partnership and as of January 1, 1975, were as follows:
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¦ ¦Aug. 1, 1972 ¦Jan. 1, 1975 ¦
+-----------------+--------------+--------------¦
¦ ¦ ¦ ¦
+-----------------+--------------+--------------¦
¦Barbara Leone ¦20 ¦22 ¦
+-----------------+--------------+--------------¦
¦John Cirelli ¦17 ¦20 ¦
+-----------------+--------------+--------------¦
¦Joyce Ann Cirelli¦15 ¦18 ¦
+-----------------+--------------+--------------¦
¦Mary Cirelli ¦11 ¦13 ¦
+-----------------+--------------+--------------¦
¦Lucia Ann Cirelli¦7 ¦9 ¦
+-----------------------------------------------+
Neither Cirelli nor his wife was a partner in C Equipment Company in an individual capacity. The partnership agreement provided that a partner could dispose of his or her partnership interest subject to the other partners' right of first refusal to purchase the interest at three times the offering partner's interest in the partnership's book value.4
The partnership was formed, according to Cirelli, to involve his children in the construction business and “give them something that they would be able to use later on in their life.” Between 1972 and 1975, the partnership “purchased” construction equipment and certain other items and “leased” them at a fair rental only to the Cirelli corporation; the alleged business reason for the corporation entering into these leases was to improve its bonding capacity. The “purchases” and “leases” by the partnership extended only to a portion of the equipment used by the Cirelli corporation. At all times during the taxable years at issue, the corporation itself owned construction equipment.
No other business was conducted by the partnership during these years.
The partnership's property was always under the physical control of the...
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